(PUB) Investing 2016

the median drawdown was 25.8%, and only three saw the 20% decline turn into a drop of 33% or greater. Also, just because I expect a bear market down the road, don’t expect me to recommend drastic portfolio chang- es, such as selling out of stocks and hiding in cash. Why not? First, I don’t

that we could also see a bear market before the next president takes office in January!) Stock returns are notoriously hard to predict, though that doesn’t stop many from trying. When it comes to the bond market, it’s a different story as a bond fund’s yield is a decent predictor of its

Where do we stand today? Despite what the headlines and political rheto- ric may have you believe, the U.S. has been in a stock bull market as well as an economic expansion for about seven and a half years. The proof is in the charts on page 12. The first shows the length of each economic expansion (as defined by the National Bureau of Economic Research) since the Great Depression. The second chart plots each stock bull market with its dura- tion on the x-axis and its price gains (I used the Dow) on the y-axis. Neither the current bull market (which began on March 9, 2009) nor the economic expansion (which started at the end of June 2009) is at an extreme. However, if we get through the next presidential term without a hiccup, the bull market and economic expansion will both have reached record lengths. It is entirely possible we could set new records—there’s no immutable law that we have to experience a stock bear market or recession each decade—but in terms of setting expectations, history suggests that regardless of who wins the presidential election next week, it would not be surprising to see a bear market as well as a recession occur under their watch. As I said at the outset, I’m not predicting or forecasting a bear mar- ket. I’m just saying it is reasonable to expect one to occur at some point during the next presidential term. (Of course, there’s always the possibility

It is entirely possible we could set new records— there’s no immutable law that we have to experience a stock bear market or recession each decade.

know when the bear market will happen or what will be the cause of it (though there are any number of pundits who are currently guaranteeing a bear mar- ket next month, next quarter or next year). Second, once we do encounter a bear market, I also expect we’ll recover any losses suffered and go on to reach new, higher ground—but, again, the timing of and catalyst for those eventu- alities are unknowable. And finally, if my expectations are too low, and we avoid a bear market, well, I’ll be pleasantly surprised and doubly glad I committed to spending time in the markets rather than trying to time them. Any way the future plays out, hav- ing the proper expectations, rather than basing your portfolio strategy on pre- dictions, will make it easier to handle the inevitable ebbs and flows of the markets. n

future returns. (Dan and I will dig into this idea in detail in the coming months.) So, with Total Bond Market yielding just 1.88% today, the return prospects from bond funds aren’t inspiring. With all this being said, I don’t have any predictions for you. But I do have two additional expectations I’d like to set: First, the next bear market likely won’t be as bad as you fear. The past two bear markets have been particularly hard on investors—the bursting of the tech bubble saw 500 Index fall 44.8%, taking 50 months to recover that loss, and in the credit crisis the index fund slid 51.0% and took 42 months to recov- er to prior highs. It is natural to look at the recent past and to expect the next bear market to match those declines, but the fact is that most bear markets don’t turn into crashes. Of the 12 bear markets (defined as a 20% or greater decline) experienced over the past six decades,

SEASONALITY Tech Winter: A Cold Wind Blows

bargain, either. PRIMECAP fell 7.7%, Growth Index was off 8.5%, Morgan Growth dropped 8.9% and both Capital Opportunity and Explorer declined 10.1%, for example. Of the four Fidelity sector funds that cover the tech industry, only Fidelity Select Electronics was able to outpace the market, dropping 5.8%. Fidelity’s computers, software and broad technol- ogy funds all fell further than the >

From the end of October 2015 through the end of February 2016, the MSCI Information Technology index fell 8.1% versus 500 Index ’s 6.4% decline. Information Technology ETF dropped 8.3%. Among the sector funds, only Financials ETF and Energy ETF fell further, down 11.2% and 16.6% respectively. Managed funds with large tech holdings didn’t hold up their end of the

WINTER WAS GOOD to tech investors for a couple of years, but last year we got frozen out as Tech Winter was a bust. Most of the time, the November-to- February period I refer to as TechWinter is a four-month market season when tech stocks shine and active managers with large tech holdings shine even brighter. Then there are periods like the last one, when tech was in the tank.

The Independent Adviser for Vanguard Investors • November 2016 • 13

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